United States’ debt problems, China’s debt problems, and now there’s Canada’s $14,000,000,000,000 hidden debt problem that may just usher in the next global financial crisis…
Earlier in the month markets got this “surprise” rate hike by the Bank of Canada with the following credit level warnings:
A quick look at the BOC statement reveals that according to Poloz, “removal of some of the considerable monetary policy stimulus in place is warranted” given stronger than expected economic performance while adding that “future monetary policy decisions are not predetermined” and will be guided by economic data and financial-market developments as they “inform the outlook for inflation.”
The Central bank also said that “close attention will be paid to the sensitivity of the economy to higher interest rates” given elevated household indebtedness. The bank will give particular focus to evolution of economy’s potential and labour market conditions, while highlighting that inflation remains below 2% but has evolved “largely as expected” since July MPR.
In the statement the central bank also highlighted that “excess capacity remains in labour market, wage and price pressures more subdued than historical relationships suggest” while “geopolitical risks and uncertainties around international trade and fiscal policies remain.”
Some analysts have highlighted that in the statement’s forward guidance, the central bank removed its inflation outlook, and replaced it with an outlook on potential output and the labor market.
Finally, the bank expects moderation of pace of economic growth in 2H 2017, but GDP level higher than expected in July MPR.
This week we get this from Ambrose Evans-Pritchard
The world’s top financial watchdog has uncovered US$14 trillion of global dollar debt hidden in derivatives and swap contracts, a startling sum that doubles the underlying levels of offshore dollar credit in the international system.
The scale of this lending greatly increases the risk of a future funding crisis if inflation ever forces the U.S. Federal Reserve to tighten in earnest and drain worldwide liquidity, potentially triggering a dollar surge.
A forensic study by the Bank for International Settlements (BIS) says enormous liabilities have accrued through FX swaps, currency swaps, and “forwards.” The data is tucked away in the “footnotes” of bank reports. “Contracts worth tens of trillions of dollars stand open and trillions change hands daily. Yet one cannot find these amounts on balance sheets. This debt is, in effect, missing,” said the BIS analysis, written by the team under Claudio Borio, the chief economist.
“These transactions are functionally equivalent to borrowing and lending in the cash market. Yet the corresponding debt is not shown on the balance sheet and thus remains obscured,” they wrote in the BIS’s quarterly report.
A breathtaking gap in global accounting rules means that the debt is booked as a notional derivative, “even though it is in effect a secured loan with principal to be repaid in full at maturity.” The hidden lending comes on top of US$10.7 trillion of recorded offshore dollar debt outside U.S. jurisdiction. It pushes the combined total to US$25 trillion, or a third of global GDP. While these contracts serve as a lubricant and hedging device for world commerce, they can be plagued by currency and maturity mismatches.
The dollar swaps serve as a “money market” for global finance. Investors often take out short-term contracts that must be rolled over every three months. The great majority have maturities of less than a year. Much of the money is used to make long-term investments in illiquid assets, the time-honoured cause of financial blow-ups. “Even sound institutional investors may face difficulties. If they have trouble rolling over their hedges, they could be forced into fire sales,” said the Swiss-based watchdog.
But for now, FX doesn’t care:
We have gone from this yesterday: